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Friday, October 24, 2008

How the Clinton Years Perverted Economic Thought

If you believe the average Democrat, Bill Clinton came into office, raised taxes, and caused an economic explosion the likes of which we have never seen before. Then, George Bush took over, lowered taxes, and caused an economic malaise the likes of which we have never seen. If this were the case, it would be the first time in economic history that tax increases expanded the economy and tax cuts contracted it. In my opinion, neither is true. First, the Bush tax cuts did expand the economy, and second, the Clinton tax increases had nothing to do with the economic expansion during his Presidency.

In my opinion, the reason that the Clinton years were such good ones economically is because he came into office right at the beginning of a technological boom that saw the explosion of the transformational ideas of both the cell phone and the internet. Keep in mind that when Clinton got into office, both the cell phone and the internet were used regularly by less than ten percent of the population. By the time he left, that number was over 90%.

Furthermore, this revolution was, in my opinion, the direct result of the Reagan tax cuts. The Reagan tax cuts spawned innovation, and much of that innovation was laid into the field of technology. Companies like Microsoft, AOL, and IBM all benefitted from his tax cuts and they, and many like them, laid the groundwork for what occurred in the 1990's. In fact, if anything, Clinton tried his best to slow down the economic explosion that occurred on his watch with his ill conceived tax increases.

Finally, the technology boom lead to an internet bubble and most of the spectacular growth that happened on Clinton's watch occurred as a result of nothing more than a speculative market. For most of Clinton's second term, internet stocks were soaring out of control. At one point, AOL had twice the market cap of GM and Sears COMBINED. Amazon was gaining 30% per month in market cap even though the lost $5 dollars each and every book they sold. The economic growth of his second term was built on the back of this sort of obscene speculation.

Then, Bush took over right after this bubble burst and inherited the aftermath of the speculative market going bust. As a result, the first two years of Bush's administration wages declined significantly, and the surplus, built on the back of speculative market, turned into a deficit. Of course, it did. The government isn't going to take in nearly as much in tax receipts when it is cleaning up the mess after a speculative market crashes as it did during the speculative market. If you look at wages, they grew from 2003 through 2007 at a healthy rate. In other words, once the economy recovered from dealing with the aftermath of the internet bubble bursting, wages increased in a manner befitting a healthy economy. The budget deficit was caused by out of control spending not the results of the tax cuts.

So, let's examine just how much economic thought has been perverted. First, the center piece of Barack Obama's defense of his own tax increases is that he'll only raise them to the levels under Clinton. Democrats will point out that the economy flourished when tax rates were that high and so they will flourish again. Of course, my response is that unless we have something of the magnitude of the internet revolution brewing the comparison is totally fallacious. Unless, we are all convinced that the environment is set up for another economic revolution on the magnitude of the internet revolution, the comparisons are totally apples and oranges.

Furthermore, the performance of the economy under Bush has allowed Democrats to claim that trickle down economics is an abject failure. Of course, this is also a distortion that has its roots in the Clinton years. Bush took over after the stock market lost roughly three trillion Dollars in paper profits over the previous nine months. The economy was going to slow down no matter what the economic policy. Our economy had to pay for the excess of the previous four years. In fact, if anything, trickle down economics saved us from a much deeper recession. Furthermore, the Democrats blame the tax cuts, which they refer to as for the rich only, for wage stagnation when in reality, wages have grown just fine as soon as the economy recovered from the aftermath of the internet bust.

Finally, the Clinton years have allowed Democrats to claim that tax increases do in fact create tax revenue increase and thus allow for spending increases. After all, that's what happened under Clinton. Of course, the revenue increases had little or nothing to do with the tax increases. First of all, because the stock market exploded, the government took in unprecedented amounts of new revenue in capital gains taxes (which at the behest of the Republican Congress were reduced). Second of all, the wealth created by the internet and cell phone revolution is what grew tax receipts not Clinton's tax cuts. It's easy to balance the budget when the economy is growing based on 1) an unprecedented revolution and 2) because it is speculative. Of course, everything that Clinton was a beneficiary of, Bush had in reverse. He had to pick up the pieces of what was left of the speculative bubble that Clinton enjoyed. Of course, balancing the budget is a lot more difficult when the year previous most folks suffered heavy capital losses that they can then carry over. Furthermore, millions of jobs were lost as a result of the internet bust, and millions more as a result of 9/11.

It's unfortunate that such detailed analysis of the dynamics of the Clinton and Bush years are rarely done. As a result, it has almost become a fact that Clinton's tax increases expanded the economy and Bush's tax cuts shrank it.